Argentine Debt and the U.S. Dollar

By Leslie Elliott Armijo

Images Money / Flickr / Creative Commons Attribution-NonCommercial-ShareAlike 2.0 Generic (CC BY-NC-SA 2.0)

Multiple economic and political challenges have called into question the future status of the U.S. dollar as the world’s dominant reserve currency, but backlash from Argentina’s recent spat with the United States over defaulted bonds appears to be fueling interest in reforms that may have beneficial implications.  According to the IMF, some 61 percent of the world’s known foreign exchange reserves held by central banks around the world remain in low-yielding dollar-denominated assets, mainly U.S. Treasury bonds.  The United Nations Conference on Trade and Development (UNCTAD), China, and heavyweights in the Global South, including Brazil, are calling for international trade agreements that would give emerging economies “policy space” – allowing national governments to impose capital controls, fund exports, subsidize local industry, and keep financial services national.  Private U.S. banks, however, claim that continued U.S. dominance of world capital markets – a crucial pillar of continued reserve currency status – requires ever more open trade in financial services.  The BRICS complain about the U.S. government’s “exorbitant privilege” as the reserve currency country, with some of the sharpest complaints coming from joint statements by Brazil, Russia, India, China and South Africa. Chinese officials, though, worried about their own large dollar investments and ambivalent about the implications of renminbi internationalization, more than once have pulled the group toward a softer tone.

Argentina’s ongoing sovereign debt negotiations provide a different window onto the dollar’s reserve currency status.  Like most countries, Argentina has held a large chunk of its government’s savings in the U.S. and hired private U.S. financial institutions as its international bankers.  Today it is trying to extricate itself from U.S. markets and do its saving and financial intermediation elsewhere. Iran and Russia are doing the same, but Argentina has no foreign policy quarrel with the Obama Administration – and is not subject to U.S. financial sanctions over nuclear or military adventurism.  Buenos Aires is among those who chafe at U.S. power through the dollar, but it is primarily motivated by the U.S. Supreme Court’s decision in July to let stand a lower court judgment in favor of investors holding bonds from Argentina’s $82 billion sovereign debt default in December 2001.  Although 92 percent of the original bondholders accepted the Argentine government’s restructured (lower value) bonds in 2005 and 2010, New York Federal District Court Judge Thomas P. Griesa ruled that Argentina’s failure to settle with the holdouts means that any U.S. financial institutions, or their international affiliates, that intermediate funds enabling Argentina to stay current on payments to the majority will themselves be in contempt of court.  This has sent Argentina into “technical default.” Argentina is suing the U.S. in the International Court of Justice (whose jurisdiction the U.S. refuses to recognize) and in the court of global public opinion – pushing, for example, a recent proposal for global financial reform before the U.N. General Assembly. It has also welcomed an $11 billion currency swap agreement with China, and Chinese state banks have since pledged $6.8 billion in new infrastructure loans.  Some observers speculate that the very first loan of the New Development Bank, newly organized by the BRICS countries, could go to Argentina.

The Argentine bond case harms the perceived fairness and credibility of U.S. financial markets and, by extension, the strength of the U.S. dollar because the recent legal judgments seem capricious to many.  Senior figures at the IMF have long supported the routine inclusion in all international sovereign bond issues of a so-called “collective action clause,” which would make any restructuring accepted by two-thirds of bondholders binding on all.  The European Union already has ruled that sovereign bonds issued within the EU, including many for troubled Eastern or Southern European governments, must contain such clauses.  Moreover, the International Capital Markets Association, representing more than 400 of the world’s largest private investment institutions, has just issued a position paper endorsing obligatory collective action clauses, placing it on the same side of this issue as non-governmental organizations advocating financial architecture reform such as the New Rules for Global Finance and the Jubilee Debt Campaign.  This would give taxpayers in emerging economies – the ultimate backstop of the creditworthiness of their governments – the same bankruptcy rights as firms and households.  It is not in the interest of Latin American and other emerging economies for U.S. currency and financial dominance to end anytime soon – a tripolar reserve currency system based on the dollar, euro, and reniminbi does not yet appear able to sustain the worldwide growth and prosperity of recent decades and may in fact entail significant risks – but fairer rules for sovereign financing would benefit everyone.

* Leslie Elliott Armijo is a Visiting Scholar at Portland State University and a Research Fellow at CLALS.  She has just published The Financial Statecraft of Emerging Powers: Shield and Sword in Asia and Latin America (London: Palgrave, 2014).

September 23, 2014

Will the U.S. support controls on security contractors in Latin America?

Photo by: Charles Atkeison / flickr / Creative Commons

Photo by: Charles Atkeison / flickr / Creative Commons

An upcoming conference in Switzerland will test U.S. willingness to make good on its rhetorical support for greater control over private contractors involved in wars or similar circumstances.  The “Montreux plus five” conference in December will discuss implementation of the Montreux Document, which lays out legal obligations and “best practices” for countries that hire “Private Military and Security Companies” (PMSCs) during armed conflict.  The process emerged in 2008 to reiterate state responsibilities after contractors were found to be deeply involved in incidents in Iraq – including the torture of detainees at Abu Ghraib prison and a confrontation at Nissour Square in which 17 civilians were killed.  The United States, which participated in discussions of the Document and endorsed it, has been developing its own “standards” based on it.

Although the PMSCs in Iraq and Afghanistan – and their alleged involvement in human rights abuses – are most widely known, security contractors are deeply engaged in U.S. efforts in Latin America related to the “war on drugs.”  In the 2005-2009 period, DynCorp, Lockheed Martin, Raytheon, ITT, and ARINC collectively received counternarcotics contracts in Latin America worth a total of $1.8 billion.  The contracts include provision of intelligence, surveillance, reconnaissance, information technology, and communications equipment.  Lockheed Martin received contracts for training, equipment, and other services in Colombia and Mexico. Yet the majority (Democratic) staff of the subcommittee on contracting oversight of the U.S. Senate Committee on Homeland Security and Governmental Affairs concluded in 2010 that neither the State Department nor the Department of Defense had adequate systems to track the implementation of counternarcotics contracts.  Referring to contract and accounting errors, the Bureau of International Narcotics and Law Enforcement Affairs told the subcommittee chairman that it “does not … maintain discrete records of such occurrences since these challenges routinely occur at the embassies.”

The subcommittee’s focus was on contracting anomalies, but publicly acknowledged incidents – such as DynCorp’s violation of guidelines governing coca eradication in Colombia – suggest oversight over operations is also lacking.  In Colombia, for example, two cases of rape of a minor involving U.S. contractors were reported yet remain uninvestigated, and in Mexico a contractor appears to have been involved in torture training.

PMSCs often carry out their work within the dark interstices of sensitive operations – beyond the government’s immediate operational control but functioning with its imprimatur and expecting its protection when things go wrong.  The U.S. Senate’s acknowledgement of the need for better management and oversight over them has not driven significant reforms yet.  If the Iraq and Afghanistan experiences are any guide, problems with the monitoring of expenditures are the tip of the iceberg.  Security contractors tend to run rough over human rights, and they are often a source of tensions with both governments and the population in host countries.  The use of security contractors without effective monitoring is a source of diplomatic tension within the region as well.  DynCorp’s aerial eradication operations, for example, provoked Ecuador to file suit against Colombia in the International Court of Justice, arguing that Colombia dispersed toxic herbicides into Ecuadoran territory, damaging human health, property and the environment.  The two countries recently resolved the dispute, but the case illustrates the risk of outsourcing sensitive operations to contractors without careful monitoring.

ICJ Decision on Colombia-Nicaragua Dispute Settles Little

Photo: Patricia Iriarte Diaz Granados "orianauta" | Flickr | Creative Commons

Photo: Patricia Iriarte Diaz Granados “orianauta” | Flickr | Creative Commons

The decision announced last month by the International Court of Justice on a three-decade maritime dispute between Nicaragua and Colombia has pleased Managua and angered Colombia.  The court confirmed Colombia’s sovereignty over seven islets known as San Andrés and Providencia, but it extended Nicaragua’s sovereignty over 200 nautical miles.  The ruling means that, although Colombian jurisdiction includes a 12-mile radius around the islands, Nicaragua will control a much bigger area of the Caribbean – and greater access to fishing grounds and potential underwater oil deposits.

Colombia has rejected the ICJ verdict; refused to withdraw its navy from the contested waters; and withdrawn from the Pact of Bogotá, which recognizes ICJ jurisdiction.  Foreign Minister Holguín said Colombia wants to protect itself from future challenges to Colombian territory.  This position has implications for its neighbors.  Colombia’s withdrawal leaves a pending case brought against it by Ecuador regarding harm caused by herbicides from aerial fumigation near its border.  It also shifts back into bilateral renegotiations Colombia’s dispute with Venezuela over the Gulf of Venezuela, which Colombia had often proposed taking to the ICJ.  According to press reports, Panama, Costa Rica, and Honduras did not see themselves affected by the ICJ decision.

While ICJ decisions are final and cannot be appealed, the Court lacks the means to enforce them.  Colombia’s rejection of the ruling suggests it will take advantage of that, setting itself and Nicaragua on a collision course that will undoubtedly raise tensions in the region.  (Non-enforcement is an old problem.  The United States got the UN Security Council to support it in rejecting an ICJ decision in the 1980s that Nicaragua was entitled to reparations for U.S. support of the Contras.)  Even if the countries don’t come to blows, the dispute puts regional cooperation in crucial areas, such as counternarcotics, at risk.  It also raises questions about the willingness of countries to work with multilateral institutions.  The ALBA countries support ICJ jurisdiction now, but Colombia’s position probably will embolden them to reject it if inconvenient in the future.  Maritime disputes appear to be increasing worldwide, and Central America promises to be no different.